Ukraine's foreign and local currency sovereign ratings rise

S&P raised Ukraine’s foreign currency sovereign credit rating by one notch to ‘B-/C’ from ‘CCC+/C’ and the local currency rating to ‘B/B’ from ‘B-/C’, with a positive outlook on the country. The agency said the new governing coalition and cabinet pave the way for a renewal of relations with the IMF and better policy coordination that will allow Ukraine to restore economic and fiscal sustainability. S&P noted the positive outlook on Ukraine indicates “upward pressure on the ratings building this year and next if fiscal and external pressures abate.” Additionally, the agency noted greater investor confidence post-election will favour a higher external debt rollover rate and larger FDI inflows to the country, thus improving Ukraine’s financial account balance in 2010. Ukraine was downgraded to ‘CCC+/C’ in February 2009 on the back of risks to IMF funding to the country.

Consensus forecast for Ukraine in 2010: moderate growth is coming.

Members of the regular public consensus forecast improved forecast of economic growth in Ukraine in 2010 from 3,5% to 4%. However, the average expected fiscal deficit worsened immediately by 30 billion hryvnia - up to 85 billion hryvnia (7.4% of GDP). According to the median forecast of participants, in 2010 nominal GDP will exceed a trillion hryvnia.

The consensus forecast of economic growth was improved due to accelerating consumption (+0.4 percentage points compared with the forecast of December 2009) and investment (+0,6 percentage points). Among the sectors, the best expected dynamics is for the the industry (6.8%) and transport (6%). The most dynamic industries in 2010 promise to be mechanical engineering (11.3%) and steel (+10%).

The participants of the forecast improved their outlook for employment. Expected unemployment rate fell by 0.5 percentage points to 8,5% among people 15-70 years old (the methodology of the ILO). At the same time, the expected growth of real incomes of the population remains at that level of 2% (while some have predicted the fall of this index).

Analysts and research institutions, banks and other financial institutions have kept the average forecast exchange rate at 8.20 UAH / USD. (range of forecasts narrowed to 7,80-8,80).

Forecasts of inflation are sharply volatile. Average growth of CPI (December to December) was 13,3%, despite the fact that the maximum projection of one of the participants reached 20%. Prices of industrial producers will grow faster than the consumer, that is clearly associated with an acceleration in the industry.

Forecasting budgetary performance remains a matter of great difficulty for the participants because of lack of information about the actual state of the treasury. The outlook on the state of public finances has provided only half of participants.
In 2010, the deficit of public finances ranges from 4,4% to 9,8% of GDP. The main source of deficit is external borrowing. Participants of the consensus forecast also believe that the capitalization of banks may require from 10 to 25 billion hryvnia public funds this year.

The data for the current wave of the consensus forecast was provided by Astrum Investment Management, Concorde Capital, Dragon Capital, Erste Bank, FOREX Club, Gainsfort Research, OTP Bank, BTA Bank, Institute for Economic Research and Policy Consulting, International Bleyzer Fund, Ukrainian business magazine "Expert", investment group "Socrat", International Center for Policy Studies.

The results of the consensus forecast (average, minimum and maximum difference between the minimum and maximum values, the number of forecasts for each parameter), as well as assumptions that guided the participants in forecasting, attached to this release. Information about prognosis in the context of each participant is closed, since 6 out of 13 participants were asked not to disclose details of their forecasts.

Consensus forecast project is conducted by Expert business magazine.

If you want some additional info regarding macroeconomic or sectoral forecasts for Ukraine in 2010 please contact Igor Lutsenko (ilutsenko at gmail.com).

Yanukovych has started to act

New president of Ukraine Mr Yanukovych has started to act and first he ordered a research or better say an audit of state budget expenditures as well as disbursements from the IMF loan facility. The audit order was given to a consortium of State Prosecutor and the Accounting chamber. President also complained that exporters get their VAT on an ad hoc basis and that the prosecutor should also look into that as well as into all the state officials who do not complain to the law of Ukraine.

All this is to create pressure on Julia Tymoshenko who is still a Prime Minister and refuses to quit. Verkhovna Rada will hold a vote of no-confidence on the governmnet on March 2, which is likely to be successful. So far Tymoshenko has reacted only through convening an extraordinary meeting of the Cabinet scheduled for March 1.

New president was also outraged by the tax administration's idea that the taxes could be paid by firms "voluntarily" 3 months in advance of the due date. Such a method is used by tax authority to manipulate with the cash flow to the budget in order to avoid state coffers getting sort of empty. Indeed, this method shold be avoided if Ukraine is to speak of restoring any kind of fiscal discipline.

Looks like until Tymoshenko is still in CabMin the State Prosecutor Medved'ko will be new president's de-facto both Minister of Economy and of Finance.